Escaping Student Loan Debt via Credit Literacy

College Students are Credit Illiterate

One of the best ways to escape from crushing student loan debt is to improve one’s understanding of credit and financial subjects. If you don’t even understand how credit works, or if you don’t know how to set up a plan to pay back your student loan debt, while juggling rent payments, monthly bills and other expenses, then you have very little chance of ever actually getting out of debt.

Perhaps the biggest problem with the student loan debt crisis is that most college students lack any real understanding of how credit works, and how to use it to their advantage. Millions of students rack up billions of dollars in new debt each year without ever actually taking the time to understand how much they’re going to have to pay back in interest throughout the course of their loan.

In fact, the credit literacy problem is so extensive that Larry Chiang of Duck9.com recently conducted a survey to figure out exactly how bad things were, and is results were extremely disturbing. Here’s what he found:

Alarming Illiteracy Statistics

7.22% – The college drop-out rate due to debt or other financial pressures

5.32% – The college drop-out rate due to academic failure. Did you see that? More students drop out because of financial issues than drop out because of academic problems!

70% – The percentage of students with a credit card in their parents name. Would you trust an 18 year old with a credit card in your name? If only parents knew what their little princes and princesses were actually up to away at school…

89% – The percentage of college students who have an active checking account. We don’t see a problem with this statistic, except that it seems strange that 11% of students out there aren’t using checking accounts.

12% – The percentage of college students who have an active savings account. This is a troublesome statistic- that’s 88% of the population of college students!

68% – The percentage of college students who have a debit card. The implications here are huge – if we know that 89% of students have a checking account, why would only 68% of them have a debit card? Are the 21% of students missing here relying exclusively on credit cards to finance their purchases? Let’s hope not!

11% – The percentage of college students who know what “FICO” is. If this statistic doesn’t alarm you, the we don’t know what would. Remember that student loan debt is now the leading source of debt in the United States. If 89% of current college students don’t even know what “FICO” scores are, then how can they possibly be expected to understand what they’re getting themselves into with the billions of dollars in new debt they take out each year? How can they ever be expected to pay it all back, ensuring that our economy doesn’t collapse like it did in 2008 when homeowners who had no idea what FICO meant destroyed the entire nation’s economic outlook?

48% – The percentage of college students who have a credit card in their own name. So half of college students have a credit card, but only 11% of them know what a FICO score is? To us, that sounds like a recipe for financial disaster.

$1,050 – The average amount of debt that college students have on their credit card. California has more college students than any other state, and the minimum wage in California is $8.00 as of the time of this post, which means that it would take the average college student 131.25 hours of working a minimum wage job to pay down their credit card debt. Assuming a college student can only work 20 hours a week due to their rigorous academic schedules (read: busy personal lives), it would take 6.5 weeks to earn enough money just to pay down that debt, and that assumes that they don’t spend any of the earned money on other bills. Do you think the average 18-22 year old is responsible enough to save all the money they earn for a month and a half to start paying down their credit card debt?

58% – The percentage of college students who pay their bills late once a year and are assessed a junk fee penalty. That means that more than half of our students who have racked up $1,050 in debt and have no idea what a FICO score is are adding to their debt by failing to pay their statements on time. Does that sound like a recipe for disaster to you?

27% – The percentage of college students who pay their bills late twice per year and are assessed a junk fee penalty. That’s a pretty big percentage of students who are failing to live up to their financial obligations, who haven’t even amassed what we can be sure will be a much larger bill once they’ve financed the rest of their education are finally graduated. If the’re already missing payments now, how much worse will things get later?

25% – The percentage of college students who pay their bills late three times per year and are assessed a junk fee penalty. Each successive statistic makes our alarm bells ring even louder…

$29 – The average late fee on student credit cards, which actually isn’t all that bad. That comes out to just 2.7% assessed on the average debt of $1,050, which is far lower than we were expecting. This was perhaps the most surprising statistic of the entire study, as it seemed far too low to us.

17-60 Per Semester – The average number of direct mail credit card offers that college students receive. Should this even be legal? We aren’t so sure. While we have laws against predatory lending for homeowners, has anything similar been passed to protect the extremely vulnerable (read: profitable) demographic of young college students? Why hasn’t Congress acted to put these future professionals on a path that protects their financial footing? Could it have to do something with who finances their campaigns?

535 – The average FICO score for adults in America.

680 – The average FICO score for college students in America. Surprisingly, that isn’t all that bad! However, part of the problem is that this statistic may be misleading, since many students haven’t really had enough time yet to default on their loans, miss payments, or run into other major financial problems that will negatively affect their credit scores. It would be more interesting to see FICO scores for recent college graduates, perhaps at 1 year, 5 year and 10 year intervals.

1,280 – The number of colleges banning credit card companies from promoting their products in person on campus. Colleges are well aware of the problem and have made efforts to address it, but there’s only so much that they can do to prevent lender access to their students.

Potential Literacy Solutions

From these statistics we can tell that a major storm is brewing on college campuses across the country, and we fear for its results. As students continue to increase their exposure to significant debt levels in the hopes of landing a high paying job, what will happen if the current economic slump continues indefinitely?

Has the traditional promise of higher education been broken in America? Are there really enough jobs to go around for educated professionals, or do we need to rethink our country’s current education and employment strategy?

What can be done to protect college students from predatory lending practices, or at least to educate them about the issue of financial literacy and the trap presented by student loan debt? Would increased access to budgeting tools like Mint, Investopedia, AllFinancialMatters, CNNMoney and The Family Wallet improve the situation, or should students be required to undergo formal training as part of their college curriculum?

What Do You Think?

After reading through these statistics, what takeaways do you have from the study? Did any of these figures surprise you? What do you think should be done to address the problem of widespread credit illiteracy in college students, and to protect our country from experiencing a future student loan debt crisis similar to the problem the housing crisis caused in 2008?

Tim's experience struggling with crushing student loan debt led him to create the website Forget Student Loan Debt, where he offers advice on paying off student loans as quickly, and cheaply, as possible. His new website Forget Tax Debt, offers similar advice to people with back tax problems.

About The Author

Tim's experience struggling with crushing student loan debt led him to create the website Forget Student Loan Debt, where he offers advice on paying off student loans as quickly, and cheaply, as possible. His new website Forget Tax Debt, offers similar advice to people with back tax problems.

One Response

Micki TilleyJuly 29, 2013

Thanks for the advice here! I’ve been trying to figure out how to get rid of my credit card debt, and signing up with Mint has helped me better track expenditures, figure out where I could cut costs and start paying down my debt. I appreciate it!